Cash flow forecast: What it is, how to create it, and why
What is cash flow forecasting?
A cash flow forecast is a financial process that helps companies predict how much money will enter and leave their business. Organisations can plan more effectively by estimating expected income and expenditures over a specific period.
Cash flow forecasts vary in scope from daily and weekly overviews to comprehensive annual outlooks. Unlike budgets, which address the present, forecasts are dynamic and provide insight into what will occur in the future. Identifying risks and opportunities can help organisations better plan for the future.
Cash flow forecasts are crucial for foreseeing financial challenges, managing day-to-day operations, or planning for expansion. A cash flow forecast must remain relevant and accurate for businesses to manage their finances effectively. Using reliable accounting software like MYOB can make this process easier and more efficient.
Essential components of a cash flow forecast
To successfully manage your business finances, it’s essential to understand how a cash flow forecast works. Here’s a breakdown of the vital components:
Opening cash balance represents the cash available at the start of the forecasting period and provides the basis for other projections.
Cash inflows include sales receipts, corporate funding, dividends, proceeds from divestitures, and funds from third parties expected during the forecast period.
Total cash in reflects the total anticipated incoming funds for the period.
Cash outflows include business expenses such as wages, salaries, rent, investments, bank charges, and debt payments expected during the forecasted period.
Total cash out represents the total amount spent during the forecasted period.
Net cash flow measures whether a business generates a profit or loss by subtracting cash outflows from cash inflows.
Closing cash balance measures financial health at the end of the forecasted period by adding net cash flow to the opening balance, showing the residual amount of cash.
Your cash flow data source depends on how your business manages its finances. If you use accounting software, you can generally find the data you need to build your forecast here.
Types of cash flow forecasts
Short term
Short-term cash flow forecasts typically span a period of up to three months. Businesses use short-term forecasts on a day-to-day basis to pay bills and employee salaries while identifying cash shortages or surpluses. Keeping short-term forecasts up-to-date is essential for companies with tight cash flows or those in rapidly changing industries.
Medium term
Medium-term forecasts generally cover a period of three months to one year. They are an essential tool when developing growth strategies, adjusting for seasonal changes, or launching new products. A medium-term financial forecast can also help set quarterly goals, establish budgets, and assess the financial impact of strategic business decisions.
Long term
Long-term cash flow forecasts look beyond a year, typically up to five years. By looking at the bigger picture, these forecasts provide a better understanding of a business's sustainability and growth trajectory. A comprehensive cash flow statement is crucial for strategic planning, expansion, and attracting investors who want to understand the company's prospects.
Mixed
Mixed cash flow forecasts combine elements of short, medium, and long-term predictions. A mixed forecast might, for instance, offer a detailed weekly breakdown for the upcoming month (short-term), monthly projections for the next year (medium-term), and yearly projections for the next five years (long-term).
How to prepare an accurate cash flow forecast
Establish a business objective
Every good cash flow forecast begins with a clear purpose. Pinpointing your business needs will steer your cash flow statement in the right direction. Here are the main objectives businesses typically aim for:
Short-term liquidity planning: Daily cash needs for immediate obligations.
Interest and debt reduction: Preparing for upcoming loan or debt repayments.
Key date visibility: Monitoring cash levels for specific reporting dates.
Liquidity risk management: Spotting potential future liquidity challenges.
Growth planning: Identifying available working capital to fund expansions.
Select a reporting period
The duration of your cash flow forecast plays a significant role in its effectiveness. Finding the balance between detail and forecast length is essential to keep it actionable and accurate. Here's how to align your time frame with your objectives:
Daily reporting: Cash flow forecasting covering two to four weeks - ideal for businesses needing a detailed, day-to-day cash view.
Weekly reporting: Cash flow forecasting spanning two to six months - excellent for businesses focusing on debt management and specific date-based visibility.
Monthly reporting: Cash flow forecasting ranging from 6 to 12 months - essential for annual budgeting and growth strategies.
Choose a forecasting method
Choosing the right approach based on available data and duration helps make your projections as accurate as possible. Here are your two primary options:
Direct cash flow forecast: Uses real-time cash flow data. Best for short-term outlooks, up to 90 days. Provides insights into imminent payments and receipts.
Indirect cash flow forecast: Relies on past financial data from balance sheets and income statements. More suited for long-term forecasts, highlighting cash needs for extensive strategies or projects.
Create your report
Preparing an accurate cash flow report is a meticulous process. However, it can be a rewarding and straightforward process with the right approach. Here's a simple 5-step approach to creating a cash flow forecast:
Enter your starting point: Cash flow forecasting begins with your opening balance. Use your accounting software or the latest financial statement to locate the appropriate opening balance for your report. Think of this as your financial foundation for the upcoming period.
Gather and predict inflows: Anticipating cash inflows is crucial. Analyse past sales data and then develop projections based on current market trends. Remember to include potential revenue sources such as asset sales and dividends. Combining historical data with recent insights will help you prepare a well-informed forecast for your business.
Identify and estimate outflows: Tracking every expenditure is essential. Begin with the staples — wages, rent and overheads. Next, examine your past transaction records to determine your variable costs. Don't forget to prepare for unexpected expenses as well. Including every potential cost in your statement ensures a thorough forecast.
Compile and analyse: Calculate your projected ending balance after categorising all inflows and outflows. You can use this result to guide your financial planning by identifying liquidity potential.
Update regularly: Businesses are dynamic, and static forecasts aren’t enough. Maintain an up-to-date cash flow forecast by constantly revisiting and refining it to adjust for real-time changes, opportunities or challenges.
Bonus: Cash flow statement template
If you’re just starting your cash flow forecast journey or seeking to refine the process, check out this cash flow statement template. User-friendly and adaptable, this tool ensures businesses of all sizes can clearly and confidently map their financial futures.
Create a cash flow forecast with MYOB
Managing your cash flow is one of the most important things you can do to keep your business headed in the right direction.
With MYOB’s accounting software, you have the tools and features you need to take control of your finances. Choose an MYOB plan that includes cash flow reporting, so you have the data you need to prepare your forecasts.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.